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2019 Edelman  Trust Barometer  UK Special Report: Institutional  Investors


Panellists Introductory remarks by

Lord Paul Myners Chairman, Edelman UK Chancellor of the University of Exeter

Marisa Drew CEO Impact Advisory & Finance, Credit Suisse

Dame Helena Morrissey Founder, The 30% Club, Fund manager, Author

Richard Buxton

Simon Dingemans

Head of UK Equities, Merian Global Investors

Chairman, Financial Reporting Council

Moderator - Iain Dey, Senior Director, Head of Special Projects, Edelman UK

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A Diverse Sample Primary Investment Style Growth

36%

Value

17%

Industry-specific

12%

Activist

11%

Quantitative/Index

10%

Hedge

9%

GARP

6%

Age

Gender 53%

31.63% 22%

17%

5% Under 24 25-34

35-44

45-54

1%

55-64

65+

13%

Organizations' Assets Under Management In USD

38% 33% 15% 7% Chief Investment  Officers

Portfolio Managers

25%

25%

Respondents’ Job Titles

Financial Analysts

68.37%

3%

Directors of  Research

6% Investment Stewardship

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Edelman Trust Barometer Special Report: Institutional Investors S1: What is your approximate age range? S7. In your current job, approximately how much are your institution's investable assets? S8. Which of the following best describes your position or level within your company or organization? D2. What is the primary investment style for the funds you manage on behalf of your organization? D4. What is your gender?

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Why do investors need  to trust you?


Why do investors need to trust you?  To attract new investors to buy its stock

To effectively execute its strategic plan

To attract and retain the best and  brightest employees

43%

42%

39%

34%

42%

45%

Critically important

Important

To win new customers and grow market share

Critically important

Critically important

Important

To increase its valuation multiple

Important

To operate without unnecessary  involvement from regulators

37%

31%

31%

45%

52%

46%

Critically important

Important

Critically important

Important

Edelman Trust Barometer Special Report: Institutional Investors Q2b: Using the scale below, please rate how important it is that a company has a high level of trust when it comes to each of the following. – Important / Critically important Summary

Critically important

Important

5


Trust seen as a C­Suite and  Board­Level Priority

15% Disagree

I must trust a company’s Board of Directors  before making or recommending an investment  (% Selected)

Edelman Trust Barometer Special Report: Institutional Investors Q2a: Who do you look to be the most important stewards of trust within a company?

85% Agree

6


What drives trust levels?


A healthy corporate culture is the number one factor  that drives trust

90%

88%

87%

Maintaining a healthy  company culture

Enforcing a corporate  code of conduct at all  levels of the company

Addressing societal  issues (e.g., immigration,  inequality, diversity)

82%

Disclosing employee  diversity and  inclusion statistics

Edelman Trust Barometer Special Report: Institutional Investors Q3: How much do each of the following corporate behavioural practices positively impact your trust in a company that you are/may consider investing in or recommending? For each one, please indicate the level of impact using a 9-point scale where 1 means “no positive impact on trust” and 9 means “a great deal of positive impact on trust.” - Very positive impact (Top 4 Summary)

8


All three letters of ESG matter… Environmental factors

Governance practices

Social practices

66%

71%

63%

Important

Important

Important

UK

GLOBAL

54%

Important

54%

Important

Edelman Trust Barometer Special Report: Institutional Investors Q15: Please select how important each of the following elements are when it comes to ESG investing. For each one, please indicate how important it is using a 9-point scale where 1 means “Not at all important” and 9 means “Most important”. (Top 3 Summary)

57%

Important

9


Taking ESG seriously is a proxy  for taking risk seriously… 


“ESG and profitability are about the  same thing. They just operate on  different timescales… If you get  environmental, social and governance  factors wrong, they are financial;  they do bite you” - Euan Stirling

Global Head of Stewardship and ESG Investment at  Aberdeen Standard Investments


Investors make long­term decisions to invest based primarily on  a company’s growth strategy and its approach to risk… What investors see as the most important attributes for long­term valuation 58

Growth Strategy

40

Risk assessments

33

Employee commitment and engagement Technology & innovation pipeline

32

Shareholder engagement

32 31

Corporate Purpose Executive compensation

26

Board of director composition

26

ESG factors

22

Edelman Trust Barometer Special Report: Institutional Investors Q14: Beyond financial projections, what other aspects are important to determine a company’s long-term (3-5 year) valuation? Please select the 3 most important aspects that you use to determine a company’s long-term valuation.

12


But, investors also tell us that companies that take ESG  seriously tend to be those that take risk seriously, and  therefore perform better… ESG linked to performance

Investors believe ESG Initiatives have favourable impact  on a number of key metrics:

66%

of UK investors say  that they see a  positive correlation  between operational  performance and  ESG disclosure

55

Growth

51

Risk management

49

Return on investment

43

Reputation

Employee retention

Edelman Trust Barometer Special Report: Institutional Investors Q23: Do you see a positive correlation between operational performance and ESG disclosure? Q18: On which of the following do active ESG initiatives by a company have the most favourable contribution?

32

13


This is not a UK thing… Globally, most investors think that  operational performance and ESG disclosure are correlated Percentage that see a direct correlation between ESG implementation and operational performance 78

85

66

34

58

Global

Canada

41

Netherlands

44

Germany

Edelman Trust Barometer Special Report: Institutional Investors

Q23: Do you see a positive correlation between operational performance and ESG disclosure?

U.K.

U.S.

Japan

14


So there is a correlation between the attributes that a good  ESG policy gives you, and the attributes that make a  company a good investment

Risk management

Growth

Long Term Value

What does ESG bring? … Growth and risk

Edelman Trust Barometer Special Report: Institutional Investors

15


And they are looking all the way through the value chain

74% GLOBAL

83% UK

Edelman Trust Barometer Special Report: Institutional Investors

Q28: When evaluating social and environment risks related to an investment decision, do you consider risk to the full value chain of the company?

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Investors may say they believe in all this, but does it really impact decisions?


ESG hiring intentions  Percentage of respondents who state their firm is hiring additional staff for ESG…

…and where they sit within the firm’s organization

9.00% 49%

47% 40%

34.00%

Portfolio management ESG-specific divisions

57.00%

Governance / proxy voting / Investment stewardship

Yes No I am not sure

Edelman Trust Barometer Special Report: Institutional Investors Q20: Is your firm hiring additional staff for ESG specifically? Q21: Where do ESG-specific hires sit in the firm’s organization?

18


Investors would take lower rates of return  in exchange for more ESG/impact “My firm would consider investing with a lower rate of return if it meant investing in a company that addresses sustainable or impact investing considerations.” Percentage who agree Global

84%

86%

US

83%

Germany

83%

UK

Canada

90%

Japan

90%

Edelman Trust Barometer Special Report: Institutional Investors Q16: Please indicate the extent to which you disagree or agree with the following statement regarding ESG/impact and socially responsible investing. - My firm would consider investing with a lower rate of return if it meant investing in a company that addresses sustainable or impact investing considerations (Top 2 Summary)

19


Investors are investing more in ESG­excelling companies  What actions are your firm taking to be more attentive to ESG Risk?

UK

(% Selected)

57%

61%

Increased our investment allocation to companies that excel when it comes to ESG factors

55%

Global

57%

We vote our shares more often for board candidates that we believe will increase the company's attention to ESG issues

51%

53%

We vote our shares more often to support ESG-related policy initiatives

Edelman Trust Barometer Special Report: Institutional Investors Q17: You just indicated that your firm has changed its voting or engagement policies to be more attentive to ESG risks. Specifically, what is your firm doing in this regard?

20


Adopting a more active  approach to screening for ESG /  sustainable investments… 

21


Taking a more visible, active stance  on climate­related stewardship… 

22


And even starting to deploy short­selling strategies to profit from  companies resistant to change on ESG and sustainability… 

300

The Green Short: Funds Target Laggards in Sustainable Shif

200

100

0 2012

2013

2014

2015

2016

2017

2018

Source: Lucca De Paoli, Bloomberg, 5 November 2019

23


Diversity and ESG are not quite the same thing‌


When investors say they  want Board diversity,  what does that mean?

Investors see experience as the most important diversity metric in trusting a company 51

Experience outside the industry or sector

49

Business areas of expertise

47

Business strategy philosophies

Among those  that selected  “diversity within  a company’s Board has a significant  positive impact on trust”

34

Gender

33

Ethnicity

30

Age Nationality Race

19 17

Edelman Trust Barometer Special Report: Institutional Investors. Q6: You just said that diversity within a company’s Board of Directors and executive team has a significant positive impact on your trust in a company. What are the top 3 types of diversity you consider to be the most important when it comes to trust building?

25


Nonetheless, investors want corporate attitudes to change


Business (partly) to blame for splits in society

70%

of UK investors believe companies are partially responsible for current employee and consumer activism because they overemphasize shareholder returns at the expense of other stakeholders

89%

of UK investor agree with the statement that “some experts say that maximizing shareholder returns can no longer be the primary goal of the corporation, and that business leaders should commit to balancing the needs of shareholders with customers, employees, suppliers and local communities”

Edelman Trust Barometer Special Report: Institutional Investors Q29: Are companies partially responsible for current employee and consumer activism because they overemphasize shareholder returns at the expense of other stakeholders? Q30: Some experts say that maximizing shareholder returns can no longer be the primary goal of the corporation, and that business leaders should commit to balancing the needs of shareholders with customers, employees, suppliers and local communities. To what extent do you agree with this statement? Top 2 Summary

27


The customer is always right… How important are the following stakeholder groups to a company’s long term financial performance?

63%

Customers / clients

53%

Employees

44% Shareholders

40% Regulators

Edelman Trust Barometer Special Report: Institutional Investors Q31: Please rank the following 4 stakeholder groups in terms of their importance to a company achieving long-term positive financial results with 1 being most important and 4 being least important. - Important (Top 2 Summary)

28


A ‘scandal’ can have a purgatory effect for investors…


Investors now  trust auditors more… Following the recent controversy in  the UK accounting sector, how has  investor perception of the reliability of  company accounts changed? Changed Positively

18.00%

25.00%

57.00%

Changed Negatively No change

Edelman Trust Barometer Special Report: Institutional Investors Q1 UK: Has your view on the reliability of UK company accounts changed following the controversy regarding the auditing profession?

30


The market is always right…


A short position is a good  reading on problems % of respondents who believe a  sustained short position in a stock is an  accurate predictor of future issues and  challenges

8.00% 28.00%

Yes

64.00%

No Not sure

Edelman Trust Barometer Special Report: Institutional Investors Q2 UK: Do you consider a sustained short position in a stock an accurate predictor of future negative newsflow and problems?

32


Investors know they have power – and are willing to band  together with activists to get their way

79%

“Most companies are not prepared to handle activist campaigns”

85%

“In general, as a firm, we are more interested in taking an activist approach to investing”

91%

“I will support a reputable activist investor if I believe change is necessary at a company I invest in or recommend investing”

94%

“I believe my firm’s actions can have a meaningful role in influencing a company’s operating performance”

Edelman Trust Barometer Special Report: Institutional Investors Q7: Please indicate the extent to which you disagree or agree with the following statements regarding shareholder activism. - Agree (Top 2 Summary)

33


If you are out of favour, how do you win back trust?


Strategy is the main thing investors seek clarity on…  more than bottom line

59%

Conduct a business review and explore strategic alternatives

52%

Announce changes to a company's strategy

43%

Significant cost cuts

38% Realign executive compensation with performance

38% Replace weak performing executive management team members

29% Refresh longest tenured Board members

Edelman Trust Barometer Special Report: Institutional Investors Q12: If a company is underperforming compared to its peers and trading at a significant discount, what actions can it take to maintain your trust in its ability to improve its performance or meet expectations going forward?

35


Always, always, always hold an investor day…

38%

39%

Increase access to Board members

Introduce a long-term (3-5 year) guidance framework

49%

51%

Increase shareholder engagement outreach to communicate corporate governance initiatives

Supply additional disclosure around financial and operational performance that puts the underperformance in a context that makes sense

54%

Hold an investor day to fully explain the company's strategy and operating plan

Edelman Trust Barometer Special Report: Institutional Investors Q13: If a company is underperforming compared to its peers and trading at a significant discount, what communication tactics can it take to maintain your trust in its ability to improve its performance or meet expectations going forward?

36


On the key issue of  corporate culture, you  can offer assurance by  giving investors a bit  more access to people  in the business…

72%

Of respondents agreed that “a healthy company culture has a significant positive impact on trust”

The most important metrics or methods investors state they use to evaluate corporate culture

53

Speaking with senior leadership

51

Workforce diversity percentages

47

Speaking with current employees at all levels

44

Employee engagement surveys

Best Places to Work rankings

40

Monitoring employee social media sites like Glassdoor, Indeed

39

Voluntary employee turnover rate

38

Speaking with ex-employees

37

Edelman Trust Barometer Special Report: Institutional Investors Q4: You just said that maintaining a healthy culture has a significant positive impact on your trust in a company. What metrics or methods do you use to evaluate corporate culture and the success of the company’s human capital management practices?

37


Investors do judge you on your  use of social media When evaluating a current or prospective investment, I consult the executive’s social media channels

75% 77%

Edelman Trust Barometer Special Report: Institutional Investors Q32: Please indicate to what extent you agree or disagree with the following statements. – Agree (Top 2 Summary)

When evaluating a current or prospective investment, I consult the company’s social media channels

38


Multi­dimensional Company’s stakeholder  position within the industry engagement 

Total addressable market (TAM)

Healthy corporate culture

Employee Engagement

Strong code of conduct

Next Level Governance

Ability to attract best + brightest talent

Clear and compelling growth strategy

Company front and center on societal issues

NextGen   Investment   Criteria

Margin and profitability story

E+S

Preparedness for global social & environmental risks

E+S focused on full value chain

Cash flow outlook

Capital allocation framework

Strength of leadership team & board

Focused on emerging opportunities and risks

Board diversity & engagement

Compensation tied to ESG

39


Edelman Trust Barometer Special Report: Institutional Investors

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Profile for Edelman

2019 Edelman Trust Barometer. UK Special Report: Institutional Investors  

2019 Edelman Trust Barometer. UK Special Report: Institutional Investors  

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